Which Side Is Government On?

Millions of contract workers whose salaries are ultimately paid by government live in poverty. Uncle Sam should demand high standards, not pay as little as possible.

Ada Iglesias relies on her job as a cafeteria worker at Paramus High School in New Jersey to put food on the table for three hungry, preteen children. It's not easy. She makes $8 an hour, works only 24 hours a week, and while out of work over the school's summer recess, does not qualify for unemployment compensation. Her construction-worker husband, out of work for more than six months, also draws no unemployment insurance.

Then, after having put off seeing a doctor for seven years, Iglesias, 35, found that she needed major surgery that she might have avoided with regular check-ups. Neither Iglesias nor her husband get health insurance through their work, nor do they qualify for New Jersey Family Care, the state- and federally funded insurance program for low-income families -- although some of her co-workers do.

Now she faces huge additional bills -- $10,000 for the doctor alone, though her physician will reduce his fee, and she is applying for charity care from the hospital. "It's really rough," she says. "The kids' first sentence is, 'I'm hungry.' God knows, I hope to feed them healthy."

Indeed, feeding kids healthy meals is her job as well as her mission as a mother. Iglesias works for a company named Pomptonian, which contracts with the local school district to deliver the free and reduced-price lunches that are provided through the Child Nutrition Act. Federal funding through the Department of Agriculture provides most of Iglesias' paycheck. But like many service workers with poorly paid, precarious jobs, her family still struggles with poverty even as she works for a federal program designed to fight poverty and hunger.

Most of the nation's 420,000 school cafeteria workers are directly employed by school districts, but a growing number -- approximately 50,000 -- work for private companies, often giant global "multiservice companies" like Aramark, Compass, or Sodexho, that contract to deliver food services. Driven by fiscal pressures, school boards in states like New Jersey, with the nation's second-highest contracting-out rate, have turned to these contractors to save money.

But a study from the Rutgers University Center for Women and Work concluded that "the majority of cost savings derive from the significant cuts in wages and benefits for food service workers who previously were employed by the school district -- as much as $4.00 to $6.00 an hour" plus elimination of health insurance.

Iglesias now hopes that joining the Service Employees International Union (SEIU) will help win improvements, despite co-workers' fears of being fired if they support a union and supervisors' admonitions that a union could never win benefits for part-time workers. "The school awarded this contract to the company because they give cheap labor," Iglesias says. "Who is really responsible for not awarding benefits? It goes back to the contractor. This needs to be fixed. Something is horribly wrong."

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Something indeed is horribly wrong, but much of the responsibility stretches back to the federal government, the ultimate source of the money for Iglesias. Starting in 1931 with the passage of the Davis-Bacon Act to make sure federal construction contracts did not depress local wages, Congress and various administrations have taken steps to make the federal government, through its contracting out of work, raise or at least protect the employment standards at private companies doing public work. In 1965, for example, Congress passed the Service Contract Act (SCA), which requires federal service contractors to pay the prevailing, or median, local wage, plus a standard amount for benefits ($3.35 an hour this year).

Yet there are large loopholes and exemptions. Iglesias, for example, is not protected because the contracting agency is a local institution and SCA rules do not "flow down" with the money. The law is poorly enforced, even when it does apply. In 2007 the Labor Department found in 80 percent of its SCA investigations that employers underpaid wages or benefits or both. And wages are so low in many service jobs, especially where few workers belong to unions, that prevailing wages are often only sub-poverty wages.

The problems have worsened over the past decades. The federal government accelerated contracting out under the Clinton administration, but Vice President Al Gore's initiative to reinvent government eventually imposed some labor standards for federal contractors. Then George W. Bush quickly cancelled the standards and more than doubled federal contracting to more than $500 billion annually by 2008, bringing in its wake cost overruns, poor performance, scandals, and deteriorating conditions for many workers.

The government does not systematically compile data on the contract work force, but the varied authoritative estimates agree: The federal contract work force is huge, growing fast, and disproportionately underpaid. For example, the Economic Policy Institute (EPI) concludes that there are now about 2 million contract workers, up from 1.4 million in 2000, compared to 2.7 million direct federal employees in 2007, and that one-fifth of all contract workers earned poverty wages or less and 40 percent less than a livable, or roughly median, wage. New York University professor Paul Light, who estimates that there were 5.4 million federal service contract workers in 2005, says that 80 percent earn low wages. And an industry consultant told The Wall Street Journal that 40 percent receive no health insurance.

These estimates do not include many workers, such as Iglesias, working on state and local contracts funded by federal dollars or on projects benefiting from federal grants, leases, subsidies, or payments such as Medicaid and Medicare.

Yet the ultimate economic impact of the federal government contracting is -- or could be -- even larger. At least 26 million people -- 22 percent of the private work force -- work for the companies that contract with the federal government. If the government uses its power as a contractor effectively, it could improve the lives of that bigger universe of workers as well.

Now it often does just the opposite.

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Thirty years ago when John Boardman, UNITE HERE Local 25 executive secretary treasurer, started working at the District of Columbia region of the hotel and restaurant union, most food workers in federal buildings worked under a master contract with a nonprofit company running the cafeterias. But President Ronald Reagan ordered individual agencies to seek the lowest bidder, undermining the master contract, the union, and workers' wages and benefits.

George W. Bush's administration set up shorter cycles of bidding, so "vendors compete on the price of labor," Boardman says. Agencies encourage fast-food contractors, whose SCA-mandated wages are below those of cafeterias and restaurants, to put further downward pressure on wages by expecting vendors to share revenue with the agencies. 'There's ever-increasing velocity since Bush came in," Boardman says. "The bidding process ends up putting huge pressure on people producing the product."

Just before President Barack Obama took office, the Pentagon put its entire food service out to bid. Workers, many who had worked for decades in the food services, went from making around $14 an hour with a hefty benefit package to making $8 an hour with few benefits. "Ultimately, they take jobs that are life-sustaining and convert them to poverty crap," Boardman says. "We go through this every time the contract changes."

The dynamic is similar, but with distinct variations, for other federal service contractors in building services, security guards, and laundries: Despite some protection from the SCA, federal contracting often lowers conditions for workers, even beyond the contracted jobs themselves.

In most big cities, like Washington, large majorities of janitors in big private-sector buildings, unlike food servers, are unionized, making the SCA more meaningful for contract-building service workers and making it easier for them to unionize. But nationally, less than a fifth of building cleaners are unionized, so contract workers in smaller cities and nonunion regions are more vulnerable.

"With the economic downturn, we've seen an increase in contracting out," says Mitch Ackerman, SEIU executive vice president and property services division director. "So increased use of outsourced work puts downward pressure on wages, benefits, and staffing levels." In many cases, he adds, "spillover [from federal low-wage contracting] is entrenching poverty," when more pay for such workers would stimulate economic growth.

Even in a union stronghold like New York, with 90 percent of janitors and half of security guards unionized, the president of SEIU Local 32BJ, Mike Fishman, says "the public sector is pulling down wages in private-sector work."

after september 11, federal demand for security guards surged. This is an industry with a few giant multinationals (like British Group4Securicor and its U.S. acquisition, Wackenhut) and many smaller companies. In most parts of the country, security guards are less unionized and often even worse paid than janitors. The same contracting process that ignores wages and recruitment of highly motivated workers is also likely to ignore training and professionalism. A key issue for federal contracts is guard performance, as illustrated by a recent Government Accountability Office critique of sleeping and ineffective contract guards for the Federal Protective Service or earlier failings of Wackenhut guards at nuclear plants.

Commercial laundries, like food processors, recyclers, and certain other service providers, often work on government and private client contracts in the same facility, but under the SCA they are supposed to segregate the work to meet SCA standards on the government work, or, better yet, pay at least the SCA rate for all the workers' hours. Since the SCA requires the health-care payment, its rates can actually be higher than in many union contracts -- a potential positive spillover of federal contract rules.

But Workers United/SEIU research coordinator Jason Oringer says that most businesses ignore the rule, as did the Bush Labor Department. In one promising victory in Hayward, California, state courts ruled last year that laundry-industry leader -- and labor-rights scofflaw -- Cintas owed $1.4 million for not paying its workers the local living wage, which it owed since it had a contract with the city. The case shows in a small way how high public standards can extend their influence on the work force.

Even in industries where federal contracting is less prevalent, government policies often drive down wages and working conditions for service workers. Airline deregulation, for example, has promoted a boom-and-bust cycle for carriers, which responded first with contracting out less-skilled jobs, like cleaners, ramp workers, and baggage handlers, then moved up the skill scale to mechanics. Contract workers typically earn much less -- cleaners for one previously unionized airline dropped from $15 to $20 an hour with benefits to $8 to $9 an hour without benefits -- and a less stable, trained, and experienced work force operates in airport areas affecting safety and security, says Teamster union campaign coordinator Bernadette McCulloch.

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Clearly the American economy has not been working well for most low-wage, moderately skilled service workers. As President Obama said at a Chicago fundraising event in July 2009, "Even before the crisis hit, we had an economy that was not doing everything it needed to be doing. It was not firing on all cylinders. It was good at creating a great deal of wealth for folks at the very top but not a lot of good-paying jobs for the rest of America."

Unfortunately, federal policies, including the vast reach of government contracting, have worsened social inequality and fostered poverty and insecurity of the growing service sector. "Government shouldn't create poverty jobs," SEIU leader Fishman says. "That's the bottom line." And that bottom line should not be limited to the contract work but to the contractor's broader behavior. SEIU director of global organizing Christy Hoffman asks, "How do you build systems that give credit for good employers, not subsidize bad actors?" And how do you make sure companies doing government business are good employers everywhere, not just on public contracts?

The federal government has a stake in creating good jobs. First, there are hidden costs, such as Medicaid, Earned Income Tax Credits, and various social services when bottom-feeding companies win contracts and impoverish workers. One way or another, government pays. Roughly extrapolating from state studies, Change to Win analyst George Faraday estimates that state and federal governments pay $16 billion yearly in the hidden costs of poverty-wage federal contracts. And that doesn't include the social costs of poverty and inequality. Beyond elementary questions of justice, creating good jobs also strengthens society and stimulates the economy.

State and local governments that have passed living-wage laws or reward contract bidders for good behavior (including good treatment of workers) have also found that services are better, costly worker turnover is reduced, and there is even more competition for the contracts. European governments subcontract less than the U.S. government does. Even when they do, the problems are not as great. Everyone has health insurance; more worker rights -- such as a minimum four weeks paid vacation -- are guaranteed by law; and either minimum wages are high ($12.54 an hour in France) or union-negotiated wage standards are extended to the entire industry by law (as in Germany and the Nordic countries).

With Barack Obama now in office, progressive reformers have raised their sights. Instead of seeking lowest-cost contracts, the federal government could pursue "best value" contracts with companies that win points on their bid for being law-abiding, socially responsible businesses that treat workers well. Unions can also have a better chance of organizing workers when contractors are required to obey labor laws generally and don't follow a race to the bottom.

Ideally, an Office of Working Americans in the White House with representatives in every agency could promote a presidential agenda of using the federal government's actions at every turn to promote good jobs. Previous administrations have used such offices to advance their goals -- Republicans to impose cost-benefit obstacles to regulation or promote faith-based groups, Democrats to promote environmental justice. Obama, who ordered a review of procurement in March, can do a lot through executive orders, but legislation could also be useful. There is no excuse for workers like Ada Iglesias, whose employers are paid with federal funds, to live in poverty.